What is Investment Fraud and How to Detect Investment Scams

  • By David Lukic
  • Dec 14, 2020

Investment scams are another effective way criminals separate U.S. citizens from their life-long savings. Sometimes the scammer calls out of the blue; other times, you might receive an enticing email or visit a website after seeing an ad that you just can’t resist reading about. Regardless of how they get their foot in the door, once you hand over any money, you’re victim of investment fraud, and they’re gone. 

investment scam

How Does Investment Scams Work

Investment scams work because they promise huge profits with very little to no risk. They substantiate this information using fancy websites, charts, graphs, and what appears to be inside information. However, there is a hint of secrecy surrounding the deal and an urgency to act fast, or you will lose this great opportunity. Those are big tip offs, right there. 

Sometimes scammers prey on people who have recently lost money in the stock market. Their angle is to give you hope that you can recoup your losses quickly and make even more money in one fell swoop. Usually, the man or woman who approaches you is nice, professional and seems like they are doing a good deed by including you in the loop, but all they are really doing is picking your pocket. 

Types of Investment Frauds

There are dozens of variants of the investment scams. Here are a few common ones to watch out for:

Pump and Dump Investment Fraud

The pump and dump scam is when a group of scammers or even semi-legitimate stockbrokers contact customers to invest in a low-cost stock that they “know is going to peak soon.” The problem is all their efforts to get people to buy the stock is what raises the price, and when it does peak, the scammers sell their shares for a profit and leave you empty-handed. 

Advance Fee Scam

The advance-fee scam relies on the desperation of investors who have realized serious losses. They promise huge ROIs on small investments, but the catch is you have to pay the refundable fee, deposit, or taxes in advance. So, you do, and then you never hear from the scammer or your money again. 

Boiler Room Scam

The boiler room scam is quite involved in that a group of people set up a legitimate-looking war room with computers, phones, stock tickers, and a professional website. To all eyes, they look like a real investment firm, but it’s all fake. However, after bilking as many people as they can out of their hard-earned money, they close up shop and leave a vacant space where your savings used to be. 

Ponzi & Pyramid Investment Fraud Schemes

investment frauds

Ponzi and pyramid schemes target groups of people such as friends, families, or others with a common interest. Criminals lure a few in and then use the victims to spread the word to their friends and add to the mix. These scammers have you pay upfront fees to the investors who will come later, and then you will reap your rewards; however, those rewards never come. 

Offshore Investing Investment Fraud

Scammers offer what sounds like huge returns on overseas investments, and as a bonus, you end up paying less in taxes. Once they are done with you, however, you are out the money, which was lost in a foreign country and impossible to retrieve, and now you owe the U.S. government penalties and fees for trying to avoid paying taxes.

Pension Fraud

investment scams

Dozens of scams target the elderly and people with a pension. They may take advantage by offering to manage your life insurance policies or getting your pension funds early through a low-cost loan. But be careful of going down that road, you could lose it all. 

How to Avoid Investment Fraud

Often the best way to stay safe is to use a good dose of common sense. Some ways to protect yourself from investment scams are:

  • Always verify the information given. Check the company out thoroughly; don’t trust what some stranger tells you. Make sure the broker is registered to actually sell securities or commodities. 

  • Be careful of any unsolicited calls, emails or mailings that promise significant returns quickly with a low risk (there is always a risk). That is not how investing works.

  • Never make snap decisions. If someone is pressuring you with terminology like “have to act fast,” or “don’t want to miss this opportunity,” it’s probably a scam.

  • Watch out for commodities, deals, and offshore offerings.

Where to Report Investment Fraud 

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